Year: 2025
Type: report
Abstract: Minimum wage policies are a central instrument for reducing poverty, improving income distribution, and enhancing social protection. Yet their broader macroeconomic impacts remain contested, particularly in developing economies with persistent high inflation. Drawing on a Post-Keynesian framework, this paper examines the impact of minimum wage increases on inflation, unemployment rate, demand, and the trade balance in Türkiye, a country characterized by persistent high inflation and where approximately three-quarters of the workforce earns between 50% and 150% of the minimum wage. Using monthly data from 2005 to 2024 and Structural Vector Autoregression (SVAR) models, we analyze the relationships between minimum wage adjustments, consumer prices, unemployment, capacity utilization, and trade balance. We employ two distinct inflation measures: the Consumer Price Index from TurkStat and the Cost of Living Index from the İstanbul Chamber of Commerce. Our findings indicate that a 10% increase in the minimum wage raises annual inflation by 1.0-2.0 percentage points. This inflationary effect is primarily driven by the cost channel, as opposed to the demand channel. Exchange rate movements emerge as a more powerful inflation driver than wage adjustments in Türkiye's context. The analysis finds no significant evidence that minimum wage increases influence demand-side factors such as capacity utilization, industrial growth, or retail sales. Contrary to traditional predictions, the impact on unemployment is minimal —0.10 to 0.15 percentage points. Moreover, a 10% rise in the minimum wage generates an extra trade deficit amounting to 0.11–0.27% of annual GDP. These results suggest that while minimum wage policy remains a viable tool for improving low-wage workers' welfare, given its moderate inflationary effect and minimal impact on employment, policymakers should consider complementary measures to enhance productivity and non-price competitiveness to mitigate mild negative external balance effects.
Authors: Oyvat, Cem, Elgin, Ceyhun, Elveren, Adem Yavuz
Institutions: Boğaziçi University, İzmir University of Economics
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W7112295619
Cites:
Cited by:
Related to: